DJs bosses get millions in early bonus

David Jones chief executive Paul Zahra held 1.27 million shares and 300,000 performance rights in the company at the end of July 2013. Under Woolworths’ offer of $4 per share, this could net him up to $6.3 million.
Photo: Dominic Lorrimer

David Jones
chief executive
Paul Zahra
and seven senior executives stand to make as much as $4 million by selling performance rights that are not due to be paid until 2015 and 2016 into
Woolworths
’ $2.15 billion takeover offer.

The David Jones board has decided to exercise its discretionary powers and allow some of the 1 million performance rights held by Mr Zahra and his executive team to vest ahead of schedule, even though performance hurdles will not have been met.

David Jones chairman
Gordon Cairns
said the board’s decision to exercise its discretionary powers had the support of Woolworths, which has offered $4 per share through a scheme of arrangement that requires the approval of both sets of shareholders.

“We were of a similar mind, a similar predisposition," Mr Cairns told The Australian Financial Review on Tuesday.

The decision is aimed at ensuring David Jones’s senior executives remain focused on running the business rather than contemplating their futures ahead of the Woolworths takeover.

“In the unlikely event it’s not going ahead, we don’t want to be losing people during the course of the scheme arrangement," Mr Cairns said.

“We wanted people focused on running the business and we also wanted retention. Woolworths had a similar view – if they were successful they would want a business with momentum and expressed a strong desire to have a team in place. They didn’t want to lose people and have people focusing on another career move," he said.

“The David Jones board met and considered whether we should exercise the discretionary powers we have in regards to the long-term incentive scheme," he said. “It gives management more certainty that if we exercised our discretionary powers they would be looked after."

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Under the terms of David Jones’s long-term incentive plan, performance rights only convert to shares when the company achieves certain performance hurdles based on relative total shareholder returns and earnings per share growth by the end of 2015.

Board’s wide discretionary powers

However, in the event of a change in control, the board has the right to assess the company’s performance to the date of the change in control. The number of rights that could vest would be pro-rated from the start of the performance period to the date of the takeover.

Mr Cairns said the board had a wide range of discretionary powers it could exercise, including adjusting hurdle rates and payment dates, but declined to elaborate, saying the changes were still under discussion.

“Some rights could be exercisable and some not," he said.

Any changes must be approved by the Australian Securities Exchange and details of the board’s decision will be set out in scheme documents due to be released late next month.

If vesting dates are brought forward to May or June 2014, Mr Zahra and team stand to make millions by accepting the Woolworths offer. According to David Jones’s 2013 annual report, Mr Zahra held 1.27 million shares and 300,000 performance rights at the end of July 2013. Under Woolworths’ $4 a share cash offer, Mr Zahra’s shares would fetch $5.1 million; if all his 300,000 performance rights vested he could collect another $1.2 million.

Other senior executives who stand to benefit from early vesting of the performance rights include chief financial officer
Brad Soller
, who has 150,000 performance rights; head of operations
Cate Daniels
and head of merchandise
Donna Player
, who have 125,000 each; and retail services head
Antony Karp
and head of customer innovation and growth
David Robinson
, who have 75,000 rights each.

Investors generally disapprove of retesting of performance rights, but Mr Cairns said it was not a retest. “We have, under the rules of the long-term incentive plan, the ability to exercise discretion," he said. “Shareholders would want to ensure we kept the team focused on running the business."

David Jones’s board recommended shareholders accept the Woolworths offer in the absence of a superior offer. David Jones shares have risen from $2.67 last October, before Myer pitched a merger of equals proposal, to $3.92 this week.